Smart Ways to Use Your Tax Refund

By Jackie Lam, AFC®
Published on: 03/14/2023

If you're lucky enough, there might be a few times during the year when you can expect an extra chunk of cash. An end-of-year work bonus, an "extra paycheck" where you get three paychecks instead of two for a given month, and your tax refund.

A smaller refund this year?

For the 2021 tax year (aka 2022), taxpayers like yourself received an average refund of $3,176—up $2,791 or nearly 14% from the year prior.

Why's that? Well, the Biden administration and Congress expanded key tax credits to put more cash into the pockets of taxpayers who needed it the most, says Hannah Cole, an Asheville, N.C.-based tax professional, founder of Sunlight Tax and host of the Sunlight Podcast.

This assistance came in the form of an expanded child tax credit, pandemic unemployment, and making unemployment payments temporarily tax-free, to cite a few examples. Plus, because stimulus checks weren't offered in 2022, you wouldn't be able to use that as a credit against taxes owed for the year, adds Helena Swyter, a CPA and co-founder of the Chicago-based tax services firm Sweeter CPA.

While it depends on your situation, taxpayers should expect their tax refunds to be smaller this year, explains Cole. "Now that those [tax credits] have expired, your refund will likely be smaller than it was last year and the year before," she says.

Everyone's refund looks different

Some tax refunds are smaller than others, and some taxpayers might not get one this year. "Everyone’s situation is different, so it can be frustrating to hear of a friend getting a significantly larger refund," says Swyter. "Keep in mind that you likely don’t know their entire tax situation, and a direct comparison is often tricky."

If you're expecting a refund from Uncle Sam this tax season, it's important to spend it wisely. Here are 8 smart ways to put your tax refund to good use:

1. Create an emergency fund

If you don't already have an emergency fund, Cole recommends first to bolster your emergency fund so you have at least three to six months' of living expenses tucked away. It's important to have emergency savings before focusing on your other money priorities, or before paying off your debt at full throttle.

That's because if you don't have a cash cushion, you could easily find yourself racking up more debt during lean times or if an unexpected expense pops up.

2. Transfer it to a savings account

Want to fatten your sinking funds? Save for a summer vacation? Or toward a down payment on a house? You might want to use that tax refund to make steady progress on your savings goals.

Some good news: If you signed up for a direct deposit for your tax refund, you can split up your refund into up to three financial accounts. (Yes, it's pretty simple.) These can be a savings or checking account, a health savings account, education account, or even certain retirement accounts. So consider divvying up your tax refund to put toward a few separate savings goals.

3. Pay off debt

If your emergency fund is in a good place, Cole suggests using what's left over to pay down credit card and other high-interest debt. High-interest debt can be very expensive, so if you are able to, pay it off as soon as you can.

This might be a tall order, especially if you're feeling financially stretched. But putting at least a portion of your tax refund toward your credit card or personal loan payments can make a big difference.

4. Contribute to a retirement or health savings account

Want to get a jump on next year's tax-favored accounts or retirement contributions? Consider funding your IRA or Health Savings Account (HSAs), suggests Swyter.

For 2023, you can put up to $6,500 into an IRA. If you have a high-deductible health plan (HDHP) and have an HSA, you can squirrel away up to $3,850 for individual coverage and $7,750 for family coverage. "While contributions to these accounts can be made up until the return for the year is filed, making contributions earlier allows more time for your money to grow," says Swyter.

5. Put it toward an education fund for yourself or your kids

If your kids are planning to go to college, or you'd like to go back to school, save part of your tax refund toward an education fund.

One option to think about or consider is to open a 529 savings account for you or your kids. These state-administered plans are designed to help you save for future eligible education costs. While 529 plans aren't tax deferred, they grow federally tax-free.

And depending on where you live, you might be able to scoop up tax savings at the state level. You'll need to use funds from a 529 savings account for qualified educational expenses, so be sure to read the fine print and understand the rules. While there are tax perks to 529 savings accounts, they are investments, so be sure to understand the risk in contributing to such an account.

6. Invest it

Investing might be one of those things at the top of your mind, but end up sinking to the bottom of your financial to-do list. Take advantage of that influx of cash from the IRS and consider investing in the stock market.

Micro investing platforms and discount brokerages make it easy to get started. Often, you only need a few bucks to dip your toes. If you're new to the world of investing, it's a good idea to consult with a financial advisor before getting started.

7. Cover future tax expenses

We know it's not the most exciting way to use a tax refund. But if you're a gig economy worker or have various side hustles, and expect to owe taxes for 2023, you can choose to roll over your refund into a savings account to pay for future tax liabilities, points out Swyter.

"This is especially useful for self-employed individuals who may be paying taxes quarterly," says Swyter. "As the first quarter payment for 2023 is due April 18th—the same date by which the annual return for 2022 is due— taxpayers may choose to apply the 2022 refund to the Q1 2023 payment and save themselves time."

8. Treat yourself

Psychologically, it can feel nice to buy yourself a small reward when you use the rest of this money responsibly and to further your big life goals, says Cole. Just remember to keep the reward small (aka no new cars or spontaneous trips to Cancun).

"A nice dinner, for example, can make you feel pleasure at a time where you're doing the right thing," says Cole, "and that's the kind of positive feedback loop you want to cultivate as you do the hard thing of paying down debt and securing your financial future."

It might be tempting to spend all of your tax refund. But deciding on using it wisely can help you financially down the line. Your future self will thank you.

About the author

A personal finance writer for over 8 years, Jackie Lam covers money management, lending, insurance, investing, and banking, and personal stories. An AFC® accredited financial coach, she is passionate about helping freelance creatives design money systems on irregular income, gain greater awareness of their money narratives, and overcome mental and emotional blocks.

Her work has appeared in publications such as Bankrate, Time's NextAdvisor, CNET, Forbes,, and BuzzFeed. She is the 2022 recipient of Money Management International's Financial Literacy and Education in Communities (FLEC) Award, and a two-time Plutus Awards nominee for Best Freelancer in Personal Finance Media. She lives in Los Angeles where she spends her free time swimming, drumming, and daydreaming about stickers.

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Written on March 14, 2023
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